A fixed-term employment contract is a widely used work arrangement where an employee is hired for a specific period or project-based work rather than on a permanent basis.
Many businesses prefer fixed-term contracts for seasonal roles, project-based positions, or temporary staffing needs, while employees may see them as an opportunity to gain experience, flexibility, or short-term career opportunities.
But is a fixed-term contract the right choice for your business?
This guide explains what fixed-term employment contracts are, their key advantages and disadvantages, and what employers should consider before using them.
What is a Fixed-Term Employment Contract?
A fixed-term contract is an employment agreement set for a specific duration, with a clearly defined start and end date.
Unlike permanent employment, which continues indefinitely, this contract automatically terminates upon reaching the agreed timeframe unless renewed or extended.
Globally, corporations like Amazon, Google, and Accenture leverage fixed-term contracts to efficiently manage workforce demands. Here are some of the key features of a fixed-term contract:
- Predefined End Date: The contract automatically ends when the agreed period expires.
- Project-Based or Temporary Roles: Often used for short-term needs such as seasonal work, special projects, or maternity cover.
- Employer Flexibility: Companies can adjust their workforce based on business demands.
Fixed-term contracts can range from a few months to several years, depending on the nature of the job.
Pros of Fixed-Term Employment Contracts
Fixed-term employment contracts offer numerous advantages for businesses looking to optimize workforce management and control costs. Here are some of the key benefits:
1. Workforce Flexibility– Companies can adjust their workforce in response to fluctuating business demands, ensuring they have the right talent at the right time without long-term employment commitments.
2. Cost-Effectiveness– Since fixed-term employees are often not entitled to long-term benefits such as pensions or extensive severance packages, businesses can manage labor costs more effectively. This is particularly beneficial for organizations with tight budgets or short-term projects.
3. Access to Specialized Talent– Businesses can recruit experts with niche skills for short-term projects without permanently increasing headcount. This is particularly useful for industries requiring specialized expertise, such as IT, construction, or consulting.
Cons of Fixed-Term Employment Contracts
While fixed-term contracts essentially provide your organization agility in workforce management, they also present legal and operational risks. It’s essential for you to understand how these challenges vary across jurisdictions as these ultimately influence both your hiring strategy and compliance obligations.
Below are critical considerations commonly influence decision-making when employing fixed-term staff:
1. Frequent Recruitment and Higher Turnover Costs
Fixed-term positions often result in continuous hiring cycles, leading to increased costs for recruitment, training, and onboarding. Employers will have to invest in efficient talent acquisition strategies to minimize disruptions.
- For instance, in the Philippines, employers relying heavily on fixed-term contracts must account for additional hiring expenses as the governing Labor Code restricts contract renewals beyond six months. The regulation ensures job security for workers, but it potentially disrupts your workforce and operational continuity if you struggle to replace the talent you lost.
2. Workforce Stability and Team Cohesion
It can be challenging to build a stable, cohesive team when employees are constantly coming and going. A revolving door of employees can fundamentally impact your team’s morale, productivity, and company culture. Long-term projects may also suffer due to a lack of continuity in personnel.
- An OECD report confirms that the widespread use of temporary contracts in Spain correlated with lower productivity growth due to a lack of on-the-job training opportunities. To address this, legal employment reforms have been introduced to promote workforce stability and long-term skill development.
3. Legal and Compliance Risks
Fixed-term employment contracts are subject to different legal frameworks, which can impact contract renewals, employee rights, and employer obligations.
If your business operates in multiple countries or hires foreign employees, staying compliant with local labor laws is crucial to avoiding misclassification risks and potential disputes.
- For example, while the Philippines limits contract renewals, the United States generally has more flexibility, with state-specific laws allowing contracts to be renewed indefinitely. Employers in this case have the legal right to retain or terminate short-term staff as per contract regulations.
What to Include in a Fixed-Term Employment Contract?
To ensure clarity, fairness, and compliance, a fixed-term employment contract should generally include the following key elements:
- Start and End Dates: Clearly define the contract’s duration and specify whether extensions are possible.
- Job Role and Responsibilities: Outline the employee’s tasks and expectations to avoid misunderstandings.
- Termination Terms: Specify the conditions under which the contract can be terminated early, ensuring alignment with local labor laws.
- Justification for Fixed-Term Status: State the reason for the fixed-term arrangement, such as project completion or seasonal work.
- Working Hours and Location: Define expected working hours and where the employee will perform their duties.
- Compensation and Benefits: Specify salary, bonuses, allowances, and any statutory benefits applicable under local labor laws.
- Vacation and Sick Leave Terms: Clarify leave entitlements to ensure compliance with employment regulations.
- Renewal and Extension Conditions: Outline the possibility of renewal and the procedures involved.
The Role of an Employer of Record in Managing Fixed-Term Contracts
For businesses hiring globally, managing fixed-term contracts across different countries can be complex due to varying labor laws, tax regulations, and compliance requirements.
An Employer of Record (EOR) simplifies this process by acting as the legal employer on your behalf, handling key responsibilities from local compliance and payroll to renewals and terminations.
That means, EORs take the full legal responsibility while employees are working for you.
This is particularly useful for companies hiring employees in countries where they do not have a legal entity.
For instance, if a US company wants to hire employees in the Philippines, they can use EOR service providers such as RecruitGo who will handle everything on their behalf.
Wondering how EOR can help with your global expansion plans? Fill out the form below and one of our experts will get in touch with you.
FAQs about fixed term contracts
A fixed-term contract can last from a few months to several years, depending on the employer’s needs and local labor laws. Some jurisdictions may impose limits on how many times a contract can be renewed before it must be converted into permanent employment.
It depends on the country. In the U.S., fixed-term contracts can be renewed indefinitely unless restricted by state law. However, countries like the Philippines impose limitations to prevent employers from circumventing permanent employment benefits.
Whether a fixed-term employee is entitled to severance pay depends on local labor laws and the terms of the contract. If the contract is terminated early without just cause or in violation of legal requirements, severance pay may be mandated.
In many jurisdictions, if a fixed-term employee continues working beyond the specified contract duration without a formal renewal or new agreement, the contract may automatically convert into a permanent, indefinite-term contract.
The benefits available to fixed-term employees depend on the country and local labor laws. Some jurisdictions require fixed-term employees to receive the same benefits as permanent employees, including health insurance, paid leave, and retirement benefits. In other regions however, employers may have fewer obligations, meaning fixed-term employees may receive reduced or no benefits.
